For years, only race cars could generate 100 horsepower per liter of engine size, and then only exotic sports cars. Now, a station wagon can: the subcompact Audi A3 2.0 T. Thanks to a powerful turbocharger, the 2.0-liter engine produces exactly 200 hp, and this little rocket ship carries four (somewhat snugly seated) adults to 60 mph in just 6.7 seconds, using one of the most sophisticated transmissions ever seen. The car is so much fun to drive, you may eventually forgive Audi for making its MMI controller harder to use.

Audi's 2.0-liter four cylinder engine is one of the most sophisticated powerplants you'll ever drive. Ward's Auto Reports says it's one of the world's ten best engines. Audi combines direct injection of gasoline (DIG) into the cylinder (as opposed to spraying fuel indirectly into the intake manifold) with a compact turbocharger to generate 200 hp.

Power transfers to the front wheels through the Direct Shift Gearbox (DSG), a manual transmission that is automatically controlled by two paddle shifters behind the steering wheel or by the car (just put the console shifter in Drive). It's an auto-shifting manual transmission because there's a solid coupling (clutch plates) and a computer-controlled microprocessor that actuates the clutch, instead of your left foot. In comparison, an automatic transmission, even one you can shift manually, has a fluid coupling (torque converter) that costs you a bit of fuel efficiency.

Most automatic manual transmissions, called sequential manual transmission (SMT) or sequential manual gearbox (SMG), can be jerky when shifting, enough to annoy passengers, so they've been relegated to the sportiest models only. You can adjust the smoothness by extending the shift duration at the cost of acceleration.

But the dual shift gearbox (DSG) developed jointly with BorgWarner comprises two half-transmissions, one with gears 1-3-5 and the other with gears 2-4-6, allowing for lightning-fast, smooth shifts in about 10 milliseconds (1/100 of a second), versus 150 milliseconds for a Ferrari SMT, and the better part of a second for a normal driver who's shifting manually.

When the A3 shifts from first to second, it's engaging the second gearset. And once in second gear, the other gearset uncouples first gear and prepares third gear for the next upshift. DSG works so well that we wish more cars than just Audi and parent VW used it; reportedly, famed German transmission maker Getrag is preparing a version that can be used on hybrid cars.

The A3 is sensationally fast once the turbocharger kicks in. It works very well for merging on crowded expressways or passing on two-lane roads. Despite the one-two punch of DIG and turbo technologies, though, you'll still notice a lag when you start up from a stop. If you're trying to get away from a stop sign with crossing traffic bearing down, you may experience a few white-knuckle moments until you acclimate to the turbo lag.

Overall, expect a reasonable fuel economy of 25 mpg (city) and 31 (highway). And even though the A3 is small, it's comfortable in front for all-day driving. Smaller adults and kids will be fine in the backseat.

Among cockpit controllers, including those from Acura, BMW, Infiniti, and Mercedes-Benz, Audi's MMI (multimedia interface) is the best, hands down. The MMI has hard-coded buttons you use to select functions, which you can then further modify with the controller knob. MMI has just enough hard-wired (single function) buttons to complement the controller without cluttering the dash.

Because of the smaller cockpit of the A3, its center console is already crammed with the transmission selector, parking brake, two cupholders, and an ashtray, Audi moved the MMI controller to the face of the dashboard, right of the LCD. Bad move. The controller is farther away from the driver; there's no place to brace your wrist while driving; and the hard buttons no longer frame the controller, but run in a row below the display. Audi partisans may get used to the relocated MMI, but they're not going to like it.

The MMI belongs back on the console in the A3, even if it means relocating other components, such as the ashtray or parking brake. The transmission selector could go on the dash, as Toyota does with the Prius—except other versions of the A3 have a manual gearbox, and that requires a console-mounted shifter.

To read more about cockpit controllers, click here.

Good Entertainment

Audi offers a navigation and entertainment upgrade package for the A3 ($2,850, or $900 for audio alone) and satellite radio ($350). The Bose audio upgrade includes a six-disc MP3/WMA/CD changer in the small glovebox, premium speakers, and even better sound, but no DSP sound-shaping. Behind the LCD panel is a pair of SD slots used for playing MP3 or WMA files you've stored on SD cards.

A3 buyers can choose either Sirius or XM satellite radio, but Audi has said that future cars will restrict buyers to Sirius only. Dealers offer two audio accessories: a rudimentary iPod adapter that accommodates just five playlists (much like the first-generation BMW iPod adapter), and the 20GB PhatNoise hard-disk jukebox with a removable cartridge that you can sync at home, with a docking module. (GM offers a version of the PhatNoise device with video as well as audio on its minivans.)

The navigation system works fine, once you've entered your destination. (Voice input is a separate option from the navigation option.) To do so, press the Nav button, then using the MMI, dial in the state, city, street, and street number. Letters and numbers appear onscreen in a circle, like a 36-digit rotary phone dial, which is quaint on other Audis but a bit cramped on the A3's smaller 6-inch color display.

You can enter a business phone number and get the address if the map database contains it, but that's hit-and-miss: For instance, the main hotel in Newport, Rhode Island (the Hyatt Regency) is among the missing. For cities with a prefix—say, West Kingston—you enter West first; for streets, you enter West second. Go figure.

Most A3s come with a driver information display (DID), a small readout between the speedometer and tachometer that summarizes key information: navigation, audio, and telephone. It's useful, particular the navigation arrow pointing to your next turn with a distance-to-turn readout. The satellite radio readout shows the channel, though not the song and artist.

The leather-wrap steering wheel has Audi's wonderfully rollers for volume and channel selection, which works much better than Up and Down buttons. Audi offers xenon headlights ($800) that are self-leveling. Bluetooth runs $435. Six airbags come standard, and rear side airbags are optional; don't get them if you have kids who fall asleep leaning against the doors.

The cockpit is beautifully finished, although the all-black interior is a bit austere. The center console has two grab rails that look cool, keep assorted stuff that shouldn't be there from falling off, but also press uncomfortably against the driver's knee.

Audi's Web site works well, though we wish there was a bit more product information: Just try to find out the size of the LCD, whether the A3 has a line-in jack, how many more speakers you can get with premium audio, or whether the A3 supports an iPod connector.

The My Audi section lets you track a bit of information about the Audi you own or hope to buy, but like most automaker sites, it's not highly developed. Nine manuals and pamphlets come with the car, totaling 828 pages, including useful quick-start guides for the car and for navigation.

The A3 is a jewel of a car, and it's priced accordingly. The turbo A3 we tested costs $35,200 with every available option, such as things as the premium or sport package and dual moonroof. Opt for all-wheel drive and the 250-hp V6 engine of the A3 3.2 Quattro, and it's even faster (0 to 60 in 5.9 seconds) with more standard equipment, but the cost can surpass $42,000.

My recommendation: The A3 is great if you need a compact (169 inches) vehicle with superb handling, quick acceleration, and good storage room. But choose your options carefully: The A3 makes more sense when you keep the price closer to $30,000 than $35,000. You'll save about $5,000 over Audi's compact A4.

Play Slide Show/All Shots (12)

$26,940.00 - $36,000.00

Price: $26,940 to $36,000
Turbocharging technology and an automatically controlled manual transmission make this premium compact sports wagon shine. But the dashboard placement of the MMI controller doesn't work.

Powerful four-cylinder turbocharged engine. DVD navigation system, Bluetooth, and Bose premium audio as options. Smooth-shifting DSG gearbox. Luxurious interior.

Awkward vertical mounting of the MMI joystick controller. Cramped legroom for the driver. The car stumbles when accelerating hard from a standstill.